Sam Laidlaw, Centrica's chief executive, justified the price rise, saying: "This is a business that has got a million shareholders - a lot of pension funds and people have got their savings invested in British Gas shares and we have to look after them".

I am, of course, assuming that he's telling the truth about those 'million shareholders'. I can't find anything in their 2007 accounts to prove or disprove it.

Centrica's detailed first-half results are interesting. They did indeed book the bulk of their profits, i.e. £504 million, in Centrica Energy (gas extraction and electricity generation). Also worth noting is that Centrica only extract one-third as much gas (1,413 mmth) as they sell (4,399 mmth), so the business (i.e. the mark-up on gas) is not absurdly profitable (4.3% operating profit margin - as against 5% VAT that the government skims off the top).

Final thoughts; with ten million gas customers and six million electricity customers, Centrica's £1 billion profit is £62.50 profit per customer (or £131 if you are on dual fuel), which doesn't seem wildly excessive to me. Their tax note suggest that the group's tax bill is about 40% - 45% of profits (corporation tax, petroleum revenue tax and VAT), which I think is quite enough.

Ratings agency Standard & Poor's reckon that house prices will fall about 25% from their peak of last year, which would "plunge one in seven homeowners into negative equity".

According to my own nequity-o-meter (itself based on Bank of England figures), when prices have fallen by 25% from peak (i.e. in a year or two), there will be 'only' about a million households in nequity, i.e. about one in twenty.

The clue is here: S&P said that for every further percentage point decline in house prices, between 60,000 and 180,000 extra homeowners could fall into negative equity. That's a handsome margin of error, eh?

Funnily enough, a 25% fall is just about at the tipping point; if prices fall by 35% from peak, rather than 'only' 25%, the number of households in nequity would double.

Wednesday, 30 July 2008

Sir, You report that the government is considering an extension of the scheme whereby the Bank of England swaps mortgage-backed securities for gilts (“Darling looks at new mortgage plan”, July 28). Treasury aides are quoted as saying that “the risk would remain with lenders, not taxpayers”.

If there were no transfer of risk from private lenders, there would be no need for the scheme as the mortgage-backed securities would be marketable without the Bank's help.

"All [the children's] ferocity was turned outwards, against the enemies of the State, against foreigners, traitors, saboteurs, thought-criminals. It was almost normal for people to be frightened of their own children. And with good reason, for hardly a week passed by in which The Times did not carry a paragraph describing how some eavesdropping little sneak - 'child hero' was the phrase generally used - had overheard some compromsing remark and denounced its parents to the Thought Police." (George Orwell, 1984).

"Download the ‘Climate Crime’ cards and use them to search your home to make sure that none are happening under your own roof! Then build your ‘Climate Crime Case File’ and report back to your family to make sure they don’t commit those crimes again (or else)! You may need to keep a watchful eye over them by revisiting the case every week or two to make sure they don’t slip back into any of their old habits. You can spread your search even wider by adding even more ‘Case Files’ to your notes. What about the homes of your uncles, aunts or friends from school?" (United Kingdom, 2008)

Police are fighting a losing battle against drugs crime, with seizures having little impact on cutting supply or reducing demand, research suggests.

The government clearly weren't happy with the Advisory Council on the Misuse of Drugs, who recently concluded that there was no point in increasing criminal penalties for possession of cannabis, and were of course promptly ignored.

So now we've got the UK Drug Policy Commission, which is basically a bunch of Labour luvvies (i.e. I've never heard of any of them except The Fink), and they come up with the same conclusions.

This is sort of the opposite of 'going native'. The gummint sets up these quangos, lets them know in no uncertain terms what sort of conclusions they want them to reach, sits back ... and nope, sorry, the answer is unchanged and it's not the one the gummint wants.

In response to Peter Risdon who said "A value-added or sales tax is levied on transactions ... but they aren't income taxes". (Comment 2 here) or Snafu who said "I like VAT as it's one of the few taxes that those on benefit have to pay!" (Comment 8 here), let's just imagine that the gummint announces that from next week, VAT at 17.5% will be scrapped and replaced with a flat turnover tax of 14.89% for all businesses who make supplies that are currently VAT-able; and furthermore that supplies between businesses liable to the new turnover tax to other such businesses are exempt.

Ignoring the fact that this would save businesses some administrative hassle, how would businesses respond?

1. The originator (the manufacturer or importer, who for sake of argument suffered no input VAT) only makes supplies to other businesses, so instead of adding 17.5% to his turnover and handing that over to the taxman, he stops adding VAT and is no better or worse off.

2. The wholesaler, or a self-employed person who only makes supplies to other businesses, can stop charging VAT and doesn't have to pay VAT on inputs. But they would only have had to hand over that VAT (less input VAT) to the taxman, so they are no better or worse off.

3. The end-retailer, or a service business, who make supplies to private individuals or exempt businesses (schools, banks etc) currently charge £100 plus £17.50 VAT per unit. They no longer have to pay input VAT to their suppliers, but they could have deducted that from the VAT they pay to the taxman, so that's plus minus nothing.

They also know that under VAT, to make net turnover of £100 per unit (which for the sake of this exercise, we assume to the minimum they require to cover wages, material costs and a reasonable profit margin), they had to charge their end-customers £117.50. Under the turnover tax, they can't drop their price from £117.50 to £100, as they are only going to keep £85.11 thereof - not enough to stay in business. But they also know that their end-customer was happy to pay £117.50. So what they would do is hike their price per unit from £100 to £117.50. Instead of handing over £17.50 VAT to the taxman (£100 x £17.50) they now hand over 14.89% x £117.50 = £17.50.

So, administrative hassles aside, VAT is in economic terms exactly the same as a turnover tax.

If the gummint were to replace VAT with a turnover tax (as above), wouldn't people realise that the turnover tax is in fact a particularly harsh form of income tax on the producer? (it makes no allowance for expenses - you pay the same amount regardless of whether you make large margins or small margins or indeed losses). Imagine the political fall out every time a business goes out of business as a result of its costs rising from £80 to £90 for every £100 turnover (flipping a 5% net profit into a 5% net loss)! Would anybody say that this is somehow not as bad as corporation tax, that is only levied on net profits (so a loss making business is at least spared the expense until it can, hopefully, recover)?

Would anybody seriously suggest that the end-user (be he on benefits or not) pays the tax?*

* Of course, the economic incidence of such a turnover tax is exactly the same as the economic incidence of VAT - it results in lower income for the producer, higher end prices for the consumer and reduces output levels. All it does is transfer the legal incidence from consumer to producer.

Tuesday, 29 July 2008

Against the general background whereby the Labour gummint - desperate to shore up the inflated house prices on which its economic miracle (and their own personal wealth - the vast majority of MPs being second-home owners) was based is seriously considering giving banks (currently suffering colossal losses as house price and credit bubbles go *pop* and struggling to raise cash wherever they can find it) shed loads of taxpayers' money (possibly with a view to securing remunerative directorships once they are chucked out), comes this from today's FT...

Another Labour MP, Rob Marris [Wolverhampton South West], called on Mr Brown to consider imposing one-off taxes on oil companies and on banks, as part of setting a "clear direction".

To be fair, I suppose that "straight down the toilet" could be considered a clear direction.

If the estimated 1.1 trillion barrels of recoverable fuel [from tar sands and oil shale] in Canada and the US were extracted, it would release 980 billion tonnes of carbon dioxide, it is claimed. This could push atmospheric CO2 levels well past the point believed to trigger dangerous climate change and mass extinction of species.

*yawn*

1. Global oil production/consumption is currently 80 million barrels a day, so 1.1 trillion barrels* (they appear to be using the US trillion = 1,000,000,000,000*) is ... er ... enough for another 37 years global demand. So even if it were economically viable, this C02 is not all going to be released at once.

2. Burning one barrel of oil generates roughly three times its weight in CO2. 1 Barrel = 127 kilos = 380 kg CO2, I dunno where the other 510 kg CO2/ton come from, but hey ...

So ... is the End Of The World now more or less imminent? Do you worry more about Global Cooling or about the oil running out? Or neither?

The MSM has duly regurgitated HM Land Registry's announcement that "house prices in England and Wales edged ahead by just 0.1% during the 12 months to the end of June"

*yawn*

As explained before, HMLR's figure for the y-o-y change for any month (in this case for June, published end July) more or less tracks Nationwide's figure for two months previously (in this case April, published end April).

Nationwide reported a y-o-y fall of 1% for April 2008, so while HMLR's figure may be more scientifically accurate, it is woefully out of date.

1. There are extremes here - taking your old car to a local beauty spot, removing the number plates and torching it is obviously Not Acceptable; trying to comply with EU reg's is just as mad in the other direction. So somebody has to decide what a sensible minimum standard is.

2. Disposal has to be paid for. The best way of raising the money is a flat tax on new cars (or per ton weight, or something), as I have suggested before ...

3. ... which will hopefully encourage people to run their old cars for longer - don't forget that building a new car and scrapping the old one causes as much pollution as the new car (being, let's assume, more fuel efficient) saves in several years.

4. The MW government will of course scrap VAT post haste (15% of list price of a car, i.e. thousands of pounds), but how much will the 'disposal tax' have to be? From the article "... the End of Life Vehicle Recyclers Association, says authorised dealers are losing £200million a year - half the industry's value - to illegal merchants. The government's own estimates say only 900,000 of the 2million cars scrapped this year will have a certificate to prove they were disposed of legally", so that looks like about £200 per car (i.e. it costs £400 to do, but they get about £200 a ton for the scrap steel. So the 'disposal tax' would be about £100 per ton weight of the new car, a damn' sight less than VAT.

5. Enforcement is two-pronged, scrap dealers would fill in a form, the former owner sends off his copy to DVLA (he has to continue to pay RFL until he does, let's say) and Dept for The Enviroment goes round authorised scrapyards, and provided they seem to be complying by the rules (e.g. if they claim for 100 cars, the inspector has to be shown receipts for the onward sale of 150 tons of steel, payment to an authorised incinerator for removing 100 old batteries and so on), give them £200 for every car disposed of, cross-referenced to DVLA.

Here's Rad in his most famous personae, the alleged war criminal:When they finally caught up with him, he had adopted the Rowan Williams look and was working as a mystic healer:Which is quite surprising, given that character's obscurity. What never ceases to amaze is that they never spotted him in his rôle as satirist, broadcast weekly across half Europe. Or perhaps that's why he faked his own death back in 1998?

As a simplification campaigner, my Budget manifesto is broadly as follows:

a) Cut out £100 bn of waste from government spending.

b) Scrap the two worst taxes of all - VAT and Employer's NI - dynamic cost of this, no more than £60 billion. This leaves us around £40 billion net saving, meaning that PSBR will be more or less nil.

c) Get rid of as many in-work-benefits and income tax breaks (esp. tax relief for pensions contributions*) as possible and replace it with a flat rate income tax of 30% or so (comfortably on the upward slope of the Laffer Curve) and a personal allowance of £10,000. The dynamic cost of this would be minimal - perhaps 35% is closer to fiscally neutral?

d) Replace Council Tax, Business Rates, Stamp Duty Land Tax, Inheritance tax, TV licence fee etc. with a flat rate Land Value Tax (or Property Value Tax) on all land and buildings. A fiscally neutral rate would be about 1.2% per annum of total property values at today's values. This will go up to about 2%, assuming that values fall by 30%. If nothing else, this will keep property prices low and stable, as it will act like a higher interest rate (like in the 1950s and 1960s, when we had Schedule A taxation and Domestic Rates).

This has to be one package. I am aware that altho' people pay lip service to the benefits of simplification, there are huge vested interest in preserving the status quo:

The Lefties scream blue murder when you suggest getting rid of their beloved jealousy surcharges (higher rate tax and Inheritance Tax). The interventionists will cry foul if the tax system no longer 'encourages people to save' (rather than just enabling them to save, by leaving them higher post-tax incomes in the first place). The 'asset rich, cash poor' will whine about 'ability to pay' the LVT or PVT, which is a red herring - pensioners will be allowed to roll up unpaid tax to be repaid on death (which is yet another reason for getting rid of IHT - or else it clearly would be double taxation). The public sector unions will be horrified to learn that hundreds of thousands of bureaucrats will be made redundant. And so on.

Under my system, it will be a straight fight between people with high incomes relative to the value of property they own (in particular, tenants) and the 'asset rich, cash poor'. But seeing as income tax payers are paying for old age pensions in the first place, I think that the balance would be about right.

* As a quid pro quo, pensions paid out of funds that had not received tax relief on the way in would of course not be taxed on the way out.

Saturday, 26 July 2008

The Times published an Ipsos MORI Survey, today, which I can't find on their website, so here's the cutting: The original data at Ipsos MORI suggests that 14% think it is 'certain, very likely or fairly likely' that they will not be able to keep up with mortgage payments, but once you knock out the 36% of people who answered N/A (no mortgage or renting), that makes 22% of those with mortgages, which is a heck of a lot of households (about 2.6 million).

Which is roughly the amount of households who would be in negative equity, if prices fall another 30% before bottoming out...

Those other statistics don't look too rosy either.

(This post updated slightly, Buctootin at HPC pointed out how to reconcile the 14% with the 21%, oops).

The BBC's article about Hurricane Dolly does not - until it is rewritten later today, that is - contain the magic sentence "Experts have warned that the frequency and ferocity of such storms is set to increase if global warming is not kept in check."

Or perhaps they have changed tactics - right next to that article is one headed "Fewer hurricanes as world warms" so perhaps, they'll splice in a sentence like "Warmer oceans have reduced the frequency of such storms, but experts have warned that their ferocity is set to increase if global warming is not kept in check".

Wednesday, 23 July 2008

If you take the distribution of loan-to-value figures from Chart 1.9 to The Bank of England's latest Financial Stability Report, then, subject to a few assumptions*, the cumulative total number of households in neqative equity for each 5% fall in house prices is as follows:* The assumptions are: there are 11.8 million outstanding mortgages; mortgagors have no other financial assets or liabilities; mortgagors have kept up with normal repayments; and that the BoE's figures are as at December 2007 (a few months before the report was published). Further, it ignores BTLers (who have more than one mortgage-per-household and bought at recent peaks), which would reduce the 'number of households' slightly.

The Halifax House Price Index for June 2008 showed that house prices had fallen by an average of nearly ten per cent since December 2007, in other words, there were 200,000-odd households in NequityTM a month ago. If prices slide another ten per cent by the end of 2008, there will be 650,000 households in NequityTM.

According to last Saturday's Times, "Morgan Stanley, the investment bank, said that if prices fall by 25 per cent in the next two years, more than two million - or one in six borrowers - would be in negative equity.", which ties in nicely with the table above - we're already down ten per cent, so another twenty five per cent gets us to thirty five per cent in total, reading across from thirty five per cent gives us the grand total of 2,179,140 households in NequityTM by the end of the year.

This is easily fixed, of course, we need to liberalise planning laws (the carrot) and impose Land Value Tax on all land (the stick)*.

Surprisingly, the NIMBY point of view is expressed quite clearly (rather than being disguised as 'enviromental concerns'):

I sat and had tea with a group of locals who are dead against the proposed "affordable" development. For them there should be no "right" to live anywhere. They reminded me that their own, mega-expensive, houses were bought at the full market price, and that any development which reduces the value of their property is simply not fair.

* Dearieme, if you don't like the sound of this, you would still have the option of clubbing together with your neighbours, buying up the field at the bottom of your gardens and entering into a restrictive covenant never to build on it, so it becomes worthless and at least there's no LVT to pay on the field. You'd be mad to do so, as you'd suffer a huge capital loss on the deal, but hey, that's exactly what you are asking the farmer to do.

Having shamelessly rewritten the statistics to quadruple the number of alcohol related NHS admissions, they now throw this crap on the table:

The £25 billion bill is made up of NHS costs of £2.7 billion, crime costs of up to £15 billion and loss of productivity of up to £7.3 billion, the Department of Health report said.

The NHS £2.7 billion I have already covered. £15 billion for crime breaks down into shoplifting (see below) and fights outside pubs (which I covered here). And that loss of productivity is not a loss to the economy; a hangover is part of each person's cost of drinking in the evening (covered here)*.

Here's the gummint's killler proposal:

The report suggested ... off-licences be prevented from displaying alcohol near check-outs.

*sigh*

Sensibly run shops always have Highly Nickable Items (small, tempting and/or high value) either: at the counter (sweets, batteries, condoms); behind the counter (cigarettes, spirits); or within eyeshot thereof (the fridge for lager and cider); or on the top shelf (porn mags are very expensive and exactly the sort of thing that teenagers want to steal - this is not just prudishness).

So if we implemented this proposal, the cost of crime (and the amount of under-age drinking) would go up; or have they already borne this Unintended Consequence in mind - if half your alcohol is being stolen, you'd stop stocking it?

* In the same way as not doing overtime is part of the cost of leisuretime.

...50,000 tonnes of equipment have to be cooled to just 1.8°Kelvin above absolute zero...

Wrong, wrong, wrong. "Kelvin", in this context, means "°C above absolute zero", which in turn is "the temperature at which nothing could be colder and no heat energy remains in a substance ... by definition, exactly 0 K and −273.15 °C."

So, expanding the above quote, we get:...50,000 tonnes of equipment have to be cooled to just 1.8°°C above absolute zero above absolute zero...

Hmm. Not scary enough, obviously. So they've now revised that up to 800,000 admissions a year.

But despite this, they admit that only "£2billion of NHS money is spent every year treating patients with alcohol-related diseases", which is no higher than the guesstimate in my previous post, which is in turn only 2% of overall NHS cost and a small fraction of alcohol duty revenues. And it's not "NHS money" FFS, it's taxpayers' money.

The most outrageous claim is that "six per cent of all NHS admissions are in some way caused by drink". So what? Seeing as half of us are drunk for a couple of hours a day, I'd say this is pretty much par for the course.

The American Farmland Trust, which campaigns to protect agricultural land, estimates that 1.1m acres are lost to development* every year. But now that process has ground to a halt.

UK NIMBYs never tire of pointing out that the UK is more densely populated than France or Germany (politely overlooking the fact that we are much less densely populated than plenty of other countries).

The US NIMBYs have to resort to scary statistics like "1.1m acres". The surface area of the USA is ... 9,826,630 sq km = about 2,500 million acres. So assuming that they started building at this rate a century ago, and continued doing so for another century, there'd still be about ... er ... 2,300 million acres of undeveloped land left.

There was an intriguing article in the weekend FT on US residential land values. To cut a long story, values have fallen (and food prices risen), so developers are selling their land banks back to farmers (at a huge book loss).

But look at the figures involved:Lakewood homes, a small mid-western builder, sold 290 acres of land in the Chicago suburb of Newark at $9,650 (€6,086, £4,831)) an acre in April, nearly 40 per cent below the $15,865 an acre the company paid for the land in November 2005, to a local agricultural investor.

Assuming that Newark is a typical sort of town, even £8,000 per acre is considerably less than one per cent of the average price/value of residential land in England/Wales, which had reached about £1,200,000 per acre in January 2008.

"Sure", I hear you cry, "but the US is a big country - we have a land shortage in the UK".

Well, yes and no. The UK is more densely populated, but don't forget that in either country, most of the population lives in urban or suburban areas - and what you are paying for when you buy a house is proximity to the nearest town, because you need access to jobs, schools, shops, hospitals etc.

Further, according to the Case Schiller Index, Chicago house prices are down by about 10% over the last two years. In the UK, the maths is simple: house price = bricks and mortar plus land value. In the 1990s crash, UK house prices fell by a third (in real terms) but land values (being a balancing figure) fell by two-thirds (in real terms).

But the typical price for a house in Newark appears to be about $300,000. If prices have fallen by 10% and land values were only $1,600 per residential plot at the peak, and assuming that such land cannot have a negative value, what's the balancing figure? Where did the other $30,000 fall in value go?

I like this bit best:Health and safety hazards including overcrowding, broken glass and spilled alcohol were common, as were incidents of anti-social behaviour such as fights, assaults and criminal damage.

Took the kids to see this film yesterday. I'd love to summarise my overall impressions, but frankly, I don't have any. The whole thing left me completely tepid. It wasn't even excruitatingly bad or anything.

But the CGI is absolutely awesome. I struggle for an hour or two just to draw a pair of glasses, and they are churning out these stupendously realistic images at 24 frames a second (25 if you're watching on TV).

In among all the others lies obfuscation and large gummint dross in this morning's Andrew Marr interview, Dave The Chameleon showed a small glimmer of intelligence with his idea that it was silly to have prisons in inner cities where property values are high - these should be sold off and the money could be used to build a much larger prison out of town. Transcript here.

In other words, although the Prison Service might not pay rent for such buildings, a serious cost accountant resets the clock and asks "If the Prison Service had £x millions in the bank, would it buy or rent in an expensive area or a cheap area?" And if the Prison Service chooses to use valuable buildings, that should be treated as notional income and expenditure.

Having grasped the concept of notional costs, we should extend this to ALL government buildings, including council estates and offices in Whitehall, which leads to all sorts of interesting conclusions.

Funnily enough, the gummint kicked off the idea of Asset Management Plans, whereby all local authorities were supposed to value their properties and work out notional rents, but it was never really followed through - which is why there are so still many government offices in the centre of London which are worth billions.

Saturday, 19 July 2008

This Nulab government went one better than the normal system of pork-barrel spending. As well as just bribing people with their own tax money, they dusted down the age-old wizard wheeze of bribing people with their own debts.

"In the environment of global economic weakness at the beginning of this decade... external demand was declining and related to that, business investment was declining. We only had two alternative ways of sustaining demand and keeping the economy moving forward - one was public spending and the other was consumption. We knew that we were having to stimulate consumer spending. We knew we had pushed it up to levels which couldn't possibly be sustained into the medium and long term. But for the time being, if we had not done that, the UK economy would have gone into recession just as the United States did."

He said he was "very conscious" that stimulating consumer demand could give rise to problems in the future. "My legacy to the MPC, if you like, has been 'sort that out'," he said. Under Lord George's governorship, rates were slashed from 6 per cent in 2001 to 3.5 per cent in 2003, pushing house price inflation above 25 per cent and high street spending growth to its highest since the late-Eighties boom.

Which, apart from showing up BoE independence to be a total sham, confirms my long held suspicion that the last ten years of house price boom and 'feelgood' factor were conspiracy rather than cock-up and hardens my support for Land Value Tax - a tax which would keep house prices low and stable and prevent future governments from pulling this sort of scam.

Don't forget that the Tories will regain power in 2010, just when house prices are in meltdown. It is a pretty foregone conclusion that house prices will then stabilise and then pick up again, and they will repeat the massive economic fraud that is now starting to unravel for Nulab.

A couple of good ideas here, but it's only scratching at the problem. Bearing in mind that Nulab are going to be out for good in two years' time, we can ignore the idea about the present gummint "ending Incapacity Benefit by 2013". When the Tories get in, the economy will, as like as not, be in a real mess. IB was abused by the self-same Tories to mask true unemployment back in the 1980s (the number of claimants increased from 600,000 in 1979 to about 2.6 million in 1997, it hasn't changed much since then), what's there to say they won't continue with this fraud?

Secondly, anything James 'Photoshop' Purnell says is to be taken with a pinch of salt. Or preferably not at all.

2. Reduce income-means testing to no more than the basic rate of tax*. For millions of employees, actual and potential, who currently face marginal deduction rates of 70%** to 100%, this would on average treble their effective hourly pay - which ought to get half (?) of the five million benefit claimants willing to work again.

But is it enough to make work worthwhile? There still have to be jobs for them, so let's continue with MW's business tax policies ...

3. Scrap VAT, first on services and ultimately replace VAT on new goods with a lower rate to cover refuse collection costs. Assuming that the price-elasticity of everything is roughly unity (I don't know what else to assume), this would increase output by about 15% by volume - there'd be at least the same amount of money to spend on goods and services that are 15% cheaper. The private sector employs about 22 million people, that's potentially 3 million more vacancies.

4. Scrap Employer's NI (which would be more or less fiscally neutral, and if not, who cares? There is plenty of corporate welfare we can scrap). This would increase the number of people that businesses otherwise want to employ by at least 10%.

Steps 3 and 4 will reinforce each other, heck knows what the overall increase in employment will be, but surely we'd have something approaching 'full employment' (whatever that is). Assuming that a service business has to make a 20% mark up on salaries to cover overheads and make a profit, the break-even price it would have to charge for £1's worth of gross wages would drop from £1.66 to £1.20!

Finally, if we are to have a welfare system at all, the least-bad system must be a universal, unconditional, non-taxable, non-means tested flat rate cash benefits for all low- and non-earners, regardless of household composition and wealth.

Council Housing & Housing Benefit stick out like a sore thumb here; they will never be universal. Housing Benefit is the benefit that should be replaced with Workfare jobs - surely it is better for the State to give people £90 a week for doing something however marginal the benefit to society than to pay people to sit at home? Once this has sorted itself out for private tenants, then this could be extended to Council Tenants as well, the State would just be a landlord like any other.

* The purists say that there should be no personal allowance at all - everybody should get the CBI and pay the same rate of tax. Details, details.

“There are a few reasons why UK construction projects cost such a ridiculously high amount.

First of all, there is the universally charged Day-Works scam, charged by every single major construction firm in the UK, which essentially doubles costs. Don’t like it? Try finding a contractor who will work without it…Interestingly, it is unheard of in Japan, where I once witnessed an entire motorway built in a week.

Second of all, there is the ridiculous Health and Safety industry. Initially a decent idea as the UK had the highest rate of deaths in construction of any developed nation - now simply an industry in itself. It leads to horrendously over-engineered solutions, overspending on materials and design and huge delays in completion times. Complain about it and you’re seen as someone who wants construction workers to be mangled by any piece of passing machinery. Health and Safety employs 200,000+ people in the UK. In France, it employs no-one, and they’re not slow to adopt restrictive working practices.

Third of all, there is our horrifically labyrinthine planning process, brought about by there being simply too many politicians. In terms of population Greater Glasgow and Manhattan are pretty similar. Manhattan has 10 councillors; Glasgow has 328.

Fourthly, there is the cost of land in the UK. Progressive land release policies, such as the Greens’ Land Tax, designed to prevent speculative land banking by housebuilders, supermarkets etc are actually a good idea, which would prevent property prices from artificially inflating - I don’t generally have a lot of time for the Greens, but this is a good policy, and one that works well elsewhere.

Fifthly - there are very few skilled construction professionals in the UK, and those that are employed in the industry generally suffer from low wages, poor working conditions and often poor training. I do laugh when I hear of contractors trying to tempt school leavers to take on a career with them - abusive, one-sided contracts, no rights and short-termism are rife. Consequently, sub-contracting is everywhere.

So the next time you wonder why our major projects cost so much - simply think of the five reasons given above.”

Mr Gore is an investor in renewable energy technologies, through his chairmanship of Generation Investment Management, a fund management company managed by David Blood, former head of Goldman Sachs Asset Management. Since last year, he has also been a partner at Kleiner Perkins Caufield and Byers, the Silicon Valley venture capital fund, which is seeking to make sizeable investments in renewable energy companies.

Myron Ebell makes an excellent point further down the article “We couldn’t come close to [his] goal of producing all our electricity from solar, wind, and geothermal energy in 10 years without coercive, even authoritarian government.”

But Myron isn't quite up to speed with modern jargon. You don't "telecommute from home", you either "telecommute" or you "work from home".

When you've finished laughing, you have to see this in the context of my previous post - expectations of price rises are self-fulfilling, as are expectations of price falls.

And what's this 'fuel poverty' crapola all about? For a start, they could scrap VAT on domestic fuel (once we've left the EU) and they can forget all about this nonsense about sticking extra taxes on it to pay for windmills. Handing out 'fuel vouchers'? Isn't that a subsidy that will increase demand, hence prices, and hence have the effect of dragging those people who don't qualify for the vouchers (i.e. people who saved up for their retirement) into 'fuel poverty'?

Now we will find out whether oil prices were indeed driven by fundamentals or speculation. Or, the more sophisticated view, by hoarding, i.e. just leaving the stuff underground (there being no evidence for actual hoarding in tanks above ground).

This was explained in an FT article recently - if oil rich countries expect oil prices to rise faster than interest rates, the NPV of oil in the ground is higher than the NPV of oil that they can extract and sell today, so there is no point in pumping any at all.

Thursday, 17 July 2008

At last weekend's drink up organised by DK, I was lambasted for my support for Land Value Tax, which I see not only as a welcome simplification* but also as the 'least bad tax' (per Milton Friedman).

DK himself advanced the Poor Widow Bogey, whether he was playing Devil's Advocate or whether he is at heart a member of Tory land-owning aristocracy I do not know, and I still haven't summoned the energy to list his arguments or go through the counter-arguments.

Harry Haddock advanced the 'market gardener' anti-LVT argument, which runs briefly as follows:1. I am a market gardener on the edge of town with a lot of Valuable Fruit Trees on my one acre.2. The town expands, and all the surrounding bits of land are sold off for development.3. My hitherto agricultural land becomes potential building land, and so its market value jumps from a few thousand pounds to a million pounds (assuming that getting planning permission is a shoo-in).4. A fiscally neutral LVT rate would mean that I have to pay about £20,000 in LVT**.5. As a market gardener, I can't make that much money so but I would be forced to sell my land and I would lose my Valuable Fruit Trees.

This is not actually a big issue (but difficult to explain in a pub setting) so I'll do it here:

1. Economics says, people put their assets to most efficient use. The market gardener has a choice: sell off your one acre, bank £1 million cash and - if you so wish - buy yourself 200 acres of farmland. Sure, you might not be able to take your Valuable Fruit Trees with you, but hey. Maybe just buy 50 acres of farmland and spend £750,000 on replanting the Valuable Fruit Trees, or something?

2. English land law says, you are allowed to enter into a Restrictive Covenant to devalue your own land. See Tulk v Moxhay (The Leicester Square case). So if the market gardener is so wedded to his trees, he can enter into a Restrictive Covenant with surrounding home owners and/or the local council and their heirs, successors and assigns to use the land for market gardening in perpetuity and never to build on it. The market value of the land thus reverts back to normal agricultural value of £5,000 or so, for which LVT of £100 or so is payable every year.

3. Of course, once Market Gardener pegs it, unless his kids want to follow in his footsteps, they will be pretty miffed to find out that what they thought was a site ripe for development is in fact worthless, but hey, that's life.

If you prefer words to logic, Winston Churchill no less covered this topic in a speech much cited by Land Value Taxers (most recently Jock Coats).

* Here's the list again: LVT could and should replace Council Tax, Business Rates, SDLT, Inheritance Tax, Capital Gains Tax, the TV Licence fee, Insurance Premium Tax and VAT on domestic fuel, s106 agreements and roof taxes; net of agricultural subsidies, Housing and Council Tax Benefit, VAT zero-rating for new residential construction. Total net revenues in the order of £60 billion = 4% of GDP = 10% of all current tax revenues.

** HH didn't actually say £20,000 (I don't know if he was imagining a higher or lower figure), but this is roughly the amount that would be due were a single LVT to replace all the taxes less subsidies in the above list on a fiscally neutral basis. And yes, of course there is massive waste in gummint spending and hence scope for cutting taxes, but let's cut the worst ones first (VAT and Employer's national insurance - total revenues £120 billion - twice as much as property/wealth taxes), eh?

This is chucklesome: Last month, Mr O'Leary [Ryanair boss] said that high oil prices would drive “crappy competitors” out of the airline business.

And why are the slots at STN (which is a super little airport, acres of marble and glass) worth so much less than at LHR or LGW? The answer is, there's no direct train from London or Stratford to STN, you have to take a coach (cheap but stressful) or a taxi (expensive).

Me: Dear ...., I have just stumbled across your report ... Are you still allowed to say "mixed-race"? I thought you had to say "mixed ethnicity" (you use both terms).

To my amazement/amusement, I received the following response:

Dear Mark, ... thank you for pointing out my oversight on 'mixed-race' definition. Technically the Census collects data on what it calls "ethnic origin" and not race, and uses a "mixed" category rather than a mixed-race or mixed-ethnicity. I will bear that in mind in future work.

Wednesday, 16 July 2008

The Times devoted half of today's front page to this rather fascinating story, cont. page 8. This is well worth reading in full, if you have the time, but to sum up the salient facts:

Cost of running a flight from Heathrow to Edinburgh: £60,000Take offs and landings on an average day at Heathrow: 1,303Value of a peaktime Heathrow slot: £30 millionAverage value of BMI's Heathrow slots: £5 million

Heathrow also have a rule that an airline that 'owns' a slot must use it at least 80% of the time or it forfeits it, which is why "It is, therefore, better for a carrier such as bmi to lose £20,000 per flight than to give up a £30 million slot. For bmi this is particularly important as it is trying to keep its value up for a potential sale this year. British Airways, Virgin Atlantic and Lufthansa are all interested in buying bmi, and the biggest attraction is the airline’s 11 per cent of Heathrow slots - the second-largest holding behind BA."

Of course, in a truly free market economy with no planning restrictions, supply and demand would even out and more airports would be built, so a landing slot would have negligible value. Indeed, if 'enough' airports were built in The Good Times, there would be a huge overcapacity in The Bad Times (fear of terrorist attacks, recession, high oil prices etc) and landing slots would have negative value - airports would have to pay airlines to land there (to skim off money from passengers at the airport shops etc). And it would, to be frank, be a bit of a waste of concrete and radar equipment to build airports that sometimes stand empty for year on end.

However the NIMBYs and Greenies are in charge, which is why we have chronic airport undercapacity - which is why the slots have such a colossal scarcity value - and it surely can't have been the intention of the NIMBYs and Greenies to generate windfall gains for BMI shareholders or to encourage a system whereby airlines fly empty planes, can it?* OTOH, air travel does have external costs - it causes noise and passengers use other local transport links to and from the nearest city.

Here's the interesting bit: "... some aviation analysts believe that there are no legal grounds for these carriers to own the slots, and advocate that they should belong to the State and be leased to the highest bidder. High prices for rented slots would encourage only profitable flights, which would almost certainly mean full flights."

I gave this a few hours thought a couple of months ago and came to exactly the same conclusion. The gimmick being that such an auction process only works if there is undercapacity.

The other possibility of course is that BAA just start charging much more for slots, but as they are Spanish-owned, why would anybody advocate this?

* That would be a good Conspiracy Theory - NIMBYs and Greenies are in fact all shareholders in smaller airlines.

AFAIAA, LadyThinker was the first to spot the deeper connection between these two unsavoury characters. Seven months later, the MSM has finally cottoned on ... surely this juxtaposition in The London Lite is not a coincidence?

Tuesday, 15 July 2008

The Labour Party - originally established as the political wing of the Trade Union movement - has now reverted to type is doing its paymasters' bidding.

Fair enoughski, this was only a matter of time.

The bit I like best is the idea that "Employees working on government projects in the private sector must also be given literacy and numeracy training if they lack basic skills."

Er ... so up to now bidders for government contracts (themselves big chums of Nulab as we well know) have been employing people who "lack basic skills"? I mean, it wouldn't surprise me, educational standards being what they are and the quality of the services provided being, frankly, abysmal.

Monday, 14 July 2008

Over a thousand posts and thirty thousand visits later, have I ever changed anybody's mind about anything? Probably not. What have I learned from all this? I suppose the enormous resistance to simplification of the tax and welfare systems - it's not just that the losers cry louder than the winners, it's also that people complain if they stand to gain less from any reforms than certain other groups; and that people fail to appreciate the dynamic effects of different kinds of taxes and subsidies/hand-outs.

Which is why I am now (also) using this 'blog to chart my artistic endeavours, which re-commenced last Monday after a twenty-year hiatus, and may or may not tail off again ...

As ever, thanks to everybody who visits or leaves a comment (I am always happy to change my mind if I see a killer counter-argument); and to everybody who links to any of my posts and/or has added me to their Bloglist or blogroll.

** There were also over a million deaths from AIDS, caused by "the might of greed and inhumanity over morals and virtue", apparently. Crikey, that's a new on on me. Plus around ten million children who die in civil wars, or in the famines that those civil wars cause or are sold into slavery.

I am closing the fun online poll to establish Great Britain's daftest double-barrelled place name this evening. At the moment, Gregg Beaman's entry is streets ahead on a low turnout, but might there be a late surprise..?

Anyway, there were so many great suggestions in the comments to the original post that I think this ought to go to another couple of rounds at some stage in the future.

Alice Cook and Cityunslicker have already posted two excellent summaries of the current economic climate, which you ought to have read already. And as Ed Harrison points out, "Spain can't sell its bonds".

So what will happen next? Again, turning to Ed Harrison, there are four basic models: 1929, 1973, 1990 (Nordic) and 1990 (Japan). In re-nationalising Fannie Mae and Freddie Mac, the USA seems to be following the Japanese model, which basically means nationalising all the banks' debt problems and thus dragging things out for decades.

Our lame duck Labour government is going to do a 'scorched earth' and leave the Tories with a complete mess. But will it be 70s style complete chaos, a slow lingering Japan or a Second Great Depression? Answers on a postcard, please..................................So far, so bad. What's done is done. Question is, is there is a sensible way of putting an end to boom and bust?

The first thing is to establish the underlying cause. The problem with 'proving' things in economics is that there are so many different things in play at the same time; it is difficult to say what caused what. However, the speed at which things have deteriorated since the 'credit crunch' started hardens my belief that it's just not credit bubbles (i.e. reckless lending) that you ought to worry about - it's asset price bubbles (i.e. reckless borrowing).

You can't have one without the other - everybody knows that the Great Depression followed a period of ludicrous increases in share prices, and the 1990s recession followed a period of ludicrous increases in property values - in Japan more so than in the UK, where membership of the ERM and the high interest rates that followed German reunification nipped that particular property price bubble in the bud.

Some reckon that mortgage lending should be regulated and controlled more strictly, which IMHO is nonsense. Strict regulations always have unintended consequences - they are a sledgehammer that always misses the nut. Sure, the BoE has kept interest rates far too low far too long; and FSA supervision has been lax to the point of negligence. Which is an argument for scrapping the BoE base rate - the BoE ought to charge or pay market interest rates, and that's that fixed.

But what we should be looking at far more closely is the asset price bubble - more specifically property and land values (and it must have been clear to any sane human being that property prices had reached nearly double their sustainable level). And you can't regulate property values. All a government can do is introduce an annual ad valorem tax on current land or property values, which would act like a higher interest rate and keep land and property prices low and stable.

But, OTOH, the overall tax burden is far too high (in the UK, as in most countries). So, with my simplification-campaigner-hat on, all I can say is that all existing taxes that relate, however directly or indirectly, to land, property and/or wealth* should be scrapped and replaced with Land Value Tax or a Progressive Property Tax. As to how it would work on an administrative level, see article over at ConHome.

* Council Tax (net of Council Tax Benefit), Business Rates, Stamp Duty Land Tax, Inheritance Tax, Capital Gains Tax/Stamp Duty, the TV licence fee**, VAT on domestic fuel, Insurance Premium Tax, s106 agreements and 'roof taxes'. And all subsidies that relate to land and property (and which merely inflate values), such as agricultural land subsidies, Housing Benefit and the VAT zero-rating for new residential construction can go as well.

Rather conveniently, the total net revenues from these taxes is roughly equal to local government spending, ignoring LEA spending, so for this and a zillion other reasons, Land or Property taxes are the ideal kind of local tax.

** Let's not get into a debate about whether the BBC should be privatised outright.

Department of Transport launch additional consultation on third runway at Heathrow because "We also want to be sure, given the socio-demographic mix in the Heathrow area, that we fully understand how airport development might affect different groups in terms of race, disability, age or gender". (via Ian_QT)

As I said in my previous post... hopefully we'll see an end to the boring and misleading comments about 'worst house price falls since the 1990s' and start hearing phrases like '... in living memory' or '... since records began' or, for that matter, '... ever'.

The Daily Telegraph has now gone for "Slide in house prices is the worst since the Great Depression"

Damn. I forgot that one *kicks self*. But out of interest, am I correct in thinking that '... since the Great Depression' isn't quite such a long period as '... in living memory'?

Thursday, 10 July 2008

The revised headline is "House prices falling at fastest rate for 50 years - and interest rates won't be cut until 2009", and the author Becky Barrow has actually done a few minutes research, as evidenced by the first few sentences:

The price of the average home in Britain has plunged £17,000 since January, devastating figures revealed today. House prices are falling at a rate not witnessed since records began in the 1950s, according to the report from the banking giant Halifax. This suggests the current meltdown is even worse than the previous house price collapse in the 1990s.

So hopefully we'll see an end to the boring and misleading comments about 'worst house price falls since the 1990s' and start hearing phrases like '... in living memory' or '... since records began' or, for that matter, '... ever'.

The American leader, who has been condemned throughout his presidency for failing to tackle climate change, ended a private meeting with the words: "Goodbye from the world's biggest polluter." He then punched the air while grinning widely, as the rest of those present including Gordon Brown and Nicolas Sarkozy looked on in shock.

Wednesday, 9 July 2008

I was advising a client* a few months ago about the likely capital gains tax bill, were he and his wife to sell a house which was standing at a capital gain of £1 million**. They bought it in 1991 and lived there until 1997, when they bought a new flat in London (for job related reasons). Since then they have lived in the new flat and rented out their old home. They intend to sell the London flat (also standing at a huge capital gain) when they take early retirement in 2010 and can't decide whether to move back into their old home, or sell it and trade down.

Well, say I, the capital gain on the new flat is nothing to worry about as you lived there throughout the period of ownership - you get the so-called 'private residence exemption'. Simple enough.

And, as to your old home, if you move back in in 2010 and then decide you don't like it and sell it a year later, the gain of £1 million is divided into twenty years of ownership. The first six are exempt because you actually lived there, the last three are exempt because you lived there at some time in the period of ownership, another four years' because the law says so and then another three years because you moved away for work reasons - but the last two chunks are only exempt if you move back in for a year (Motley Fool so a nice summary of this, or you can refer to the proper legislation).

Great, so sixteen-twentieths of the gain are exempt. That leaves us with a potentially taxable gain of £200,000. Split that 50/50 between husband and wife makes £100,000 each. Knock off the £40,000 letting exemption and the Annual Exempt Amount of £9,600 leaves you with £50,400 each taxable at 18%, gives a tax bill of about £9,000 each.

"Wow, that's great," says the client, "£18,000 tax on a £1 million gain! Why are the rules so generous?"

So now we know. MPs don't just help themselves to our money to buy themselves second homes, they have bent and shaped the capital gains tax legislation to make damn' sure that they pay precious little tax either.

* I have simplified this a bit to illustrate the point.

** A bit less now, I think, but at the time the client refused to countenance the possibility that prices would tank.